Payday loans vs. installment loans: One is a much better option

Written by

Beth Deyo,

Edited by

Aylea Wilkins,

Reviewed by

Thomas Brock, CFA, CPA,

Expert verified

Published on February 24, 2025 | 6 min read

Bankrate is always editorially independent.

Key takeaways

Payday loans provide quick cash but have high interest rates and fees, making them risky.
Installment loans offer larger amounts with lower interest rates and fixed monthly payments, making them more manageable.

Only two in five Americans say they could pay for a major unexpected expense — like a $1,000 car repair — out of their savings, a recent Bankrate survey found. If you’re among the millions of Americans who would need to borrow money for an emergency, you could find yourself weighing payday vs. installment loans.

Payday loans are easy to get, but they’re notorious for their high fees and can wreak havoc on your finances. Installment loans are likely a much better option, but there are also other payday loan alternatives to consider.

Payday vs. installment loans at a glance

Payday and installment loans are borrowing options when you need cash right away. The main differences are the ease of being approved, the amount you can borrow and how long you’re given to repay the loan (plus fees and interest).

Check the chart below for a quick look at the differences.

	Payday loans	Installment loans
Collateral requirement	Unsecured (no collateral required)	Typically unsecured, though some lenders offer loans secured by collateral
Loan amount	Typically $500 or less	Up to $100,000
Funding timeline	Same day to one business day	Typically, same day to three business days
Repayment terms	One lump sum on your next payday (or within 14 days)	Paid over several months or years
Interest and fees	Flat fee of $10 to $30 per $100 borrowed; varies by state regulations	Typically much lower than payday loans but varies by credit score and lender
Application process	Quick, minimal requirements	More thorough credit check required
Impact on credit	No impact if repaid on time, but defaults can lower credit score	Can improve credit if repaid on time, defaults can harm credit score
Offered by	Payday lenders (in-store and online)	Banks, credit unions and online lenders

How do payday and short-term loans work?

Payday loans are short-term, high-interest loans designed to help people borrow money from their next paycheck. They’re available online and from payday lending stores. While payday loans can seem like a financial lifeline in an emergency, they could worsen your situation due to their high rates and tendency to trap people in debt cycles.

If you’re considering getting a payday loan, it’s crucial to understand how the process works, from application to repayment:

Applying: Most payday loans have a simple application process with few requirements. Borrowers generally need to provide proof of identity, show they have a stable income and provide their checking account information.
Approval: Loan approvals often occur in just a few minutes. Funds are usually delivered on the same day or within 24 hours.
Amounts: The loan amount is typically capped at $500 or less, depending on state regulations.
Repayment: Borrowers must repay the loan amount and fees by their next payday, which is typically within 10 to 14 days. This is often done through a postdated check or authorization for an automatic withdrawal from the borrower’s checking account.

Pros of payday loans

Despite their downsides, some advantages attract people to payday loans:

Funded quickly: Payday loans offer quick access to cash. Unlike other types of loans, the funds are often available within the same day. That makes them helpful in emergencies, like if your car needs urgent repairs and you can’t wait until payday to get it fixed.
No credit check: It’s easy to get approved for a payday loan. Unlike other lenders, payday lenders typically don’t check your credit history or credit score to determine if you qualify for a loan. Minimal credit requirements make payday loans accessible for individuals with poor credit or no credit history.
Limited paperwork: Compared to other types of loans, the application process is quick and simple, with limited paperwork. Payday lenders typically require only basic information from borrowers, such as a government-issued ID and your most recent pay stub.

Cons of payday loans

Before taking out a quick cash advance, consider the drawbacks of payday loans:

High fees: Payday loans often have steep fees, making them an extremely expensive borrowing option. Their flat fees may translate to an annual percentage rate (APR) of 600 percent or more. To put that into perspective, the average APR for a credit card is about 20 percent.
Risk to finances: When you take out a payday loan, you’re borrowing against your next paycheck. When you get paid, you might not have enough money to both repay the loan and cover your bills. If you cannot repay the loan, the lender may suggest that you “roll it over” by getting a second payday loan big enough to cover both the original amount and its fees. That option often leads to a cycle of ever-growing debt.
No credit building: A payday loan won’t help establish or repair your credit, even if you repay the loan in full and on time. Payday lenders typically don’t report any information about your payment history to the credit bureaus.

How do installment loans work?

Installment loans provide a lump sum of money that must be repaid in equal monthly installments. They’re offered by banks, credit unions and online lenders and provide a more structured and often more affordable borrowing option than payday loans.

If you’re considering getting an installment loan, it’s crucial to understand how the process works compared to getting a payday loan:

Applying: The application process for an installment loan is more thorough than that of a payday loan. You must provide more information, including proof of identity and stable income, and undergo a credit check. This information lets lenders assess your ability to repay the loan.
Approval: If you apply online, approval typically takes only a few minutes or hours. Funding typically happens within one to three business days, though some lenders offer same-day funding and others warn it could take up to two weeks.
Amounts: Loan amounts for installment loans can range from a few hundred dollars to $100,000, depending on the lender and the borrower’s creditworthiness.
Repayment: Terms for installment loans are more borrower-friendly than payday loans. Borrowers repay the loan in fixed monthly payments over several months or years, depending on the loan agreement.

Pros of installment loans

Compared to payday loans, there are many potential advantages of installment loans:

Lower interest: Generally, installment loans have significantly lower APRs compared to payday loans, making them more affordable. Rates vary depending on the lender and the loan, so be sure to compare APRs before you apply.
Helps build credit: Most installment loans are reported to the major credit bureaus, so on-time payments positively impact your credit score. However, missing payments or defaulting on the loan can negatively impact your credit score and lead to collection actions.
More manageable payments: The extended repayment period allows for smaller, more manageable payments spread over several months or years. Fixed monthly payments also make it easier to budget.

Cons of installment loans

Like any financial product, installment loans have some potential drawbacks:

Credit check required: A credit check is part of the application process for an installment loan. People with poor credit scores or no credit history might not qualify, though some lenders offer installment loans for those with lower scores.
Long-term commitment: Monthly payments can stretch out over several years, requiring long-term financial planning and discipline. This can put your finances at risk if your circumstances change and you cannot make payments.
Potential for high fees: Installment loans may have various fees, including origination fees, late fees and insufficient funds fees. These fees can add to the overall cost of the loan. It’s important to compare lenders to find the lowest-cost option.

Other alternatives to payday loans

If you’re not able to qualify for a traditional installment loan due to bad credit, you may consider working with a reputable credit repair company to raise your score, rather than taking a payday loan.

When you need emergency cash fast and can’t wait, it may make sense to explore some other alternatives to payday loans:

Ask family or friends: Asking a family member or friend for a short-term loan can help you avoid high interest rates and fees. Be sure to create a contract before accepting the money, so everyone is protected.
Look into local resources: If you need emergency cash for basic needs like rent, food or utilities, call 211 for help finding resources and services in your area.
Negotiate a payment plan with creditors: Contact your creditors to explain your financial situation. They might have hardship programs or payment plans that would help.
Payday alternative loans (PAL): Credit unions sometimes have payday alternative loans. These loans are for small amounts, usually below $1,000, and are repaid over a few months.

The bottom line

There’s a clear winner when it comes to comparing payday vs. installment loans. If you find yourself in a difficult financial situation, a payday loan is likely not the lifeline it appears to be. With their high fees and short repayment terms, these short-term loans often trap borrowers in a cycle of debt that can be hard to climb out of.

Before taking out a payday loan, carefully weigh the pros and cons and take a serious look at installment loans and other payday loan alternatives.